Greed is good (sometimes); but regulation is better

Jonathan Wolff:

So did I predict the then-coming crisis? Well, not really. George Soros once said that he had predicted 10 crises out of the last four. Those who rely on the writings of Marx are in the same position. You can be sure that a crisis is a comin', but why exactly, and when, is a mystery, until it happens.

On the other hand, it was rather shocking to hear Alan Greenspan of the US Federal Reserve blaming the crisis on a "flaw" he had recently discovered in his ideology of minimal regulation of the free market. He should have come to see me. I could have told him that the problem had been discovered in the early 1700s, by the philosopher and essayist Bertrand Mandeville.

The miracle of the free market - and it is pretty miraculous - was famously captured by Adam Smith: "It is not from the benevolence of the butcher, the brewer or the baker, that we expect our dinner, but from their regard to their own self-interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantage." As if by magic, the market harnesses self-interest for general well-being. Greed is good. Or, as Mandeville put it in his Fable of the Bees, "Private Vices, Public Virtues".

But here comes the flaw. This is all very well when shopping for tonight's dinner. If the butcher sells you rotten meat, you'll go somewhere else tomorrow, if still alive. It is this that keeps the butcher honest. But suppose you are buying meat that won't be supplied for 20 years? Still want to rely on the greed of the butcher? Thought not. By the time you have found out if he is cheating you, it will be too late to switch supplier. When there is a substantial time lag between purchase and consumption, as there is for pensions, savings schemes and sub-prime debt, the market loses its magic and the purchaser is vulnerable. Regulation might not be a bad idea after all. Otherwise, as Mandeville might have observed, Private Vices, Public Bail-Out.

Posted via web from Jim Nichols